NZ banks baulking at global FATCA style initiative to combat tax evasion; Lobby group says the later we adopt it the better

All is likely to be revealed on whether New Zealand will be an early adopter of the multilateral follow up to the controversial United States Foreign Account Tax Compliance Act (FATCA) in November, with late adoption something that would please the local banking sector.

Either way it's a question of when, not if, New Zealand adopts the initiative, which the OECD describes as a "step-change" in tackling and deterring cross-border tax evasion.

The global initiative, the so-called automatic exchange of information (AEOI), involves the Group of 20 (G20) and Organisation for Economic Co-operation and Development (OECD). New Zealand has expressed a desire to be part of AEOI, as reported by interest.co.nz in April.[3] However, neither New Zealand nor Australia put their names to a joint statement[4] from an early adopters group issued in August.

Law firm Minter Ellison Rudd Watts notes the definition of "financial institution" will be broad, capturing any entity including a trust that; accepts deposits in the ordinary course of a banking or similar business; as a substantial portion of its business, holds financial assets for the account of others; or is in a business involving trading in securities, individual and collective portfolio management or investing, administering or managing financial assets or money on behalf of other persons.

An OECD Secretary-General report [5]to G20 finance ministers, released over the weekend, says more than 60 countries and jurisdictions have committed to the AEOI's implementation, with about 40 having committed to a "specific and ambitious" timetable leading to the first automatic information exchanges in 2017.

Early adopters include India, several European countries including Germany and France, South Africa, the United Kingdom, the UK's Crown Dependencies of Isle of Man, Guernsey and Jersey; and the UK's Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Island. Their timetable sees the first exchange of information taking place by the end of September 2017.

A communique issued [6]at the weekend's G20 Finance Ministers and Central Bank Governors Meeting, held in Cairns, endorsed a global common reporting standard, or CRS, for AEOI on a reciprocal basis. The communique said the CRS will provide "a step-change in our ability to tackle and deter cross-border tax evasion."

"We will begin exchanging information automatically between each other and with other countries by 2017 or end-2018, subject to the completion of necessary legislative procedures. We call on all financial centres to make this commitment by the time of the Global Forum meeting in Berlin, to be reported at the Brisbane Summit, and support efforts to monitor global implementation of the new global standard," the communique said.

The Berlin meeting referred to is a Global Forum on Transparency and Exchange of Information for Tax Purposes on October 28 and 29. As an invited guest New Zealand was represented in Cairns by Secretary to the Treasury, Gabriel Makhlouf.

"The drive to more transparency and better exchange of information is already having a tangible effect on taxpayer behaviour, even before the AEOI Standard has become operational. In nine countries alone more than half a million taxpayers have come forward in response to voluntary disclosure programmes, revealing income and wealth hidden from tax authorities. Twenty-five countries have already identified additional revenue totaling €37 billion from these and other initiatives targeted at offshore evasion," the OECD says.

'The later the better'

However, New Zealand Bankers’ Association chief executive Kirk Hope says banks here have concerns, and the later New Zealand implements AEOI the better.

“One of our key concerns is getting the implementation date right. We think the later the date the better. This will give the banking industry more time to adapt and draw on experience gained through FATCA," says Hope.

“We think the 1 January 2016 implementation date that early adopters are aiming for is unachievable for the New Zealand banking industry. It would, for example, create problems for banks around internal project funding applications as these need to be determined well in advance. If we went for early adoption, it would require project funding in 2015, which isn’t very far away," Hope adds.

The Inland Revenue Department (IRD) says New Zealand's position should become clear in November. IRD says New Zealand participation at this year’s G20 meetings has created international expectations this country will be an early adopter.

"New Zealand supports the automatic exchange of information initiative. However implementation of the AEOI common reporting standard will have implications for New Zealand financial institutions and for Inland Revenue," an IRD spokeswoman told interest.co.nz. "We are currently consulting with financial institutions and other key stakeholders, on issues such as compliance costs and timing."

"No decisions on implementation timing for AEOI have yet been made by New Zealand Ministers."

Speaking last week, the IRD spokeswoman said implementation options will be presented to Ministers after the election with decisions on implementation to be sought.

"We anticipate that New Zealand will be in a position to clarify its intentions as to timing, at the November G20 Leaders' Summit," she said.

The G20 Leaders' Summit will be held on November 15 and 16 in Brisbane.

"While there is an international expectation that New Zealand will 'fast track' its implementation of AEOI leading to the first automatic exchange of information in 2017, New Zealand may still opt to follow Australia’s lead and implement AEOI according to a slower timeframe," Minter Ellison Rudd Watts says.

What is it?

The AEOI will involve the annual automatic exchange of financial account information between governments that enter into an AEOI agreement. In contrast the current situation involves the exchange of information on request. A global standard for AEOI establishes what information needs to be exchanged, the types of accounts and taxpayers covered, who will need to report and the common due diligence procedures financial institutions will be required to follow.

The OECD says the AEOI Standard consists of two components:

1) The CRS. This contains the reporting and due diligence rules to be imposed by participating jurisdictions on their financial institutions;

And 2) The Model CAA (Competent Authority Agreement). This features the detailed rules on the exchange of the information.

"As the single common global AEOI Standard, it breaks new ground: addressing the tax compliance needs of countries, while avoiding a proliferation of different and inconsistent standards which would lower effectiveness and increase costs for businesses and governments alike," the OECD says.

How it will work

"Under the Standard, jurisdictions obtain financial information in accordance with the CRS and automatically exchange that information with other jurisdictions, as appropriate, under a CAA on an annual basis. Under the CRS, to prevent taxpayers from circumventing the Standard, information is collected by financial institutions on the basis of common reporting and due diligence rules," says the OECD.

Financial information covered includes all types of investment income including interest, dividends, income from certain insurance contracts and other similar types of income, and also account balances and sales proceeds from financial assets.

The financial institutions dragged in includes banks and custodians, and also other financial institutions such as brokers, and "certain collective investment vehicles and insurance companies," plus accounts including those held by trusts and foundations, with "an obligation to look through passive entities to the individuals controlling these entities."

"The CAA, which can be developed bilaterally or multilaterally, activates and 'operationalises' automatic exchange between the participating countries. It specifies the information to be exchanged and would also deal with practical issues such as the timing and format of the exchange," the OECD says.

Taxing based on people's residency rather than citizenship

Earlier this year the National-led government signed an intergovernmental agreement with the US on FATCA, which has the stated aim of targeting tax evasion by US taxpayers with assets hidden offshore. It requires overseas financial institutions to identify and report information on accounts held by US persons or risk a 30% withholding on US sourced income.

The government here agreed to implement rules that require New Zealand financial institutions to comply with FATCA obligations. In exchange, the US government agreed to treat all New Zealand financial institutions as "deemed compliant."

Although FATCA was the catalyst for AEOI, the multilateral version will tax based on people's residency rather than citizenship. This means reporting should only be required for people who are tax resident in other countries, not merely because they have a non-resident citizenship status.

*Here's an OECD video[8] where AEOI is described as "the end of banking secrecy as we have known it."